Capital Assets

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Capital Assets

  1. 1. Capital Assets
  2. 2. Capital Assets <ul><li>Tangible assets used in the operations of a company </li></ul><ul><li>Have a useful life of more than one accounting period. </li></ul><ul><li>Recorded at cost - includes all normal and reasonable expenditures necessary to get the asset in place and ready for its intended use. </li></ul>
  3. 3. Amortization <ul><li>The process of allocating to expense the cost of a capital asset to the accounting periods benefiting from its use. </li></ul><ul><li>Debit Amortization Expense and credit Accumulated Amortization. </li></ul><ul><li>Amortization Methods: </li></ul><ul><ul><li>Straight-line (from chapter 4) </li></ul></ul><ul><ul><li>Units of production </li></ul></ul><ul><ul><li>Declining balance (double declining) </li></ul></ul>
  4. 4. Amortization: Units of Production Method <ul><li>Charges a varying amount to expense for each period of an asset’s useful life depending on its usage. Charges are based on the consumed capacity of the asset. </li></ul>Step 1: Step 2: Amortization Per Unit = (Cost - Salvage Value) Total Units of Production Amortization Expense = Amortization Per Unit × Number of Units Produced in the Period
  5. 5. Example Step 2: Amortization Expense = $.25 per shoe × 7,000 shoes = $1,750 Step 1: Amortization Per Unit = $10,000 - $1,000 36,000 units = $.25 per shoe
  6. 6. Amortization: Double-Declining Balance Method Step 1: Step 2: Step 3: Double- declining- balance rate = 2 × Straight - line amortization rate Amortization expense = Double- declining- balance rate × Beginning period book value Ignores salvage value until later in life Straight - line amortization rate = 100 % Useful life in years
  7. 7. Example Step 1: Step 2: Step 3: Amortization expense = 40% × $10,000 = $4,000 Double-declining- balance rate = 2 × 20% = 40% Straight-line amortization rate = 100 % 5 years = 20%
  8. 8. Example Continued 2001 Amortization: 2002 Amortization: 40% × $10,000 = $4,000 40% × $6,000 = $2,400 $10,000 - $4,000
  9. 9. Amortization and Income Tax <ul><li>Many companies use accelerated amortization in computing taxable income because it postpones tax payments by charging higher amortization expense in the early years and lower amounts in the later years. </li></ul><ul><li>Income Tax Act requires that companies use a declining-balance method for calculating the maximum capital cost allowance that may be claimed in any period. </li></ul><ul><li>The Income Tax Act specifies the prescribed rates for various groups of assets </li></ul>
  10. 10. Partial Year Amortization <ul><li>When an asset is purchased at a time other than the beginning or end of an accounting period, amortization is recorded for the part of the year the asset was in use. </li></ul><ul><li>Two methods: </li></ul><ul><ul><li>Nearest whole month </li></ul></ul><ul><ul><li>Half year rule – amortization for the first year of an asset’s life is always half a year regardless of when the asset was purchased </li></ul></ul>
  11. 11. Revising Amortization Rates <ul><li>Over the life of an asset, new information may come to light that indicates the original estimates were inaccurate. </li></ul><ul><li>When our estimates change, amortization is: </li></ul>(Book value Revised salvage value) Revised remaining useful life
  12. 12. Disposals of Capital Assets <ul><li>Assets may be discarded, sold, or exchanged due to wear and tear, obsolescence, inadequacy, or damage by fire or other accident. </li></ul><ul><li>In general, accounting for disposals requires we: </li></ul><ul><ul><li>Record amortization expense up to the date of disposal. This updates the accumulated amortization account. </li></ul></ul><ul><ul><li>Remove the balances of the disposed asset and related accumulated amortization accounts. </li></ul></ul><ul><ul><li>Record any cash (and other assets) received or paid in the disposal. </li></ul></ul><ul><ul><li>Record any gain or loss resulting from comparing the asset's book value with the value received in the disposal. </li></ul></ul>
  13. 13. Discarding Capital Assets <ul><li>If fully amortized—no loss (can never have gain if discarding) </li></ul><ul><li>If not fully amortized—Record a loss (debit) equal to the book value. </li></ul>
  14. 14. Discarding Capital Assets <ul><li>Example: A machine costing $9,000 with accumulated amortization of $9,000 is discarded on June 5. </li></ul>
  15. 15. Discarding Capital Assets <ul><li>Example 2: A machine costing $8,000 with accumulated amortization of $6,000 on December 31, 2000 is discarded on July 1.The equipment is being amortized over 8 years with no salvage value. </li></ul>
  16. 16. Selling Capital Assets <ul><li>Compare value received to book value to determine gain (receive value greater than book value) or loss (receive value less than book value). </li></ul><ul><li>Sale is at a gain if value received exceeds book value. </li></ul><ul><li>Sale at a loss if value received is less than book value. </li></ul><ul><li>Record cash received (debit) </li></ul><ul><li>Remove accumulated amortization (debit). </li></ul><ul><li>Record a gain (credit) or loss (debit). </li></ul><ul><li>Remove the asset cost (credit). </li></ul>
  17. 17. Selling Capital Assets <ul><li>Example: Delivery equipment costing $16,000 with accumulated amortization of $12,000 (on December 31, 2001) is sold on April 1, 2002 for $3000. Annual amortization is $4,000 (straight-line). </li></ul>
  18. 18. Selling Capital Assets <ul><li>Sample example except sold for $7000 </li></ul>
  19. 19. Selling Capital Assets <ul><li>Same example except sold for $2500 </li></ul>
  20. 20. Intangible Assets Non-current assets without physical substance. Useful life is often difficult to determine. Usually acquired for operational use. Intangible Assets Often provide exclusive rights or privileges.
  21. 21. Intangible Assets <ul><li>Patents </li></ul><ul><li>Copyrights </li></ul><ul><li>Leaseholds </li></ul><ul><li>Leasehold Improvements </li></ul><ul><li>Goodwill </li></ul><ul><li>Trademarks and Trade Names </li></ul><ul><li>Amortize over shorter of economic life or legal life, subject to a maximum of 40 years. </li></ul><ul><li>Use straight-line method. </li></ul><ul><li>Research and development costs are normally expensed as incurred. </li></ul>
  22. 22. Goodwill <ul><li>Occurs when one company buys another company. </li></ul><ul><li>Only purchased goodwill is an intangible asset. </li></ul><ul><li>The amount by which the purchase price exceeds the fair market value of net assets acquired. </li></ul>

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